TREASURIES-US yields climb as Fed's Powell uncertain about September easing

• Fed's Bowman, Waller were the two governor dissenters
• Fed's Powell says too soon to flag September rate cut
• US rate futures lower odds of September rate cut to 50%
• Enough evidence to suggest Fed should be cutting -PGIM economist

By Gertrude Chavez-Dreyfuss

NEW YORK, July 30 (Reuters) - U.S. Treasury yields rose on Wednesday after Federal Reserve Chair Jerome Powell said it's too soon to say whether the central bank will cut its interest rate target in September.

"We have made no decisions about September, we don't...do that in advance," Powell said at a press conference after the Fed held interest rates steady at the end of a two-day policy meeting, as widely expected.

He said going forward, "we'll be taking that information" about the economy in the run-up to the next central bank gathering.

In standing pat for a fifth straight policy meeting, the Fed cited low unemployment and solid labor market conditions. But it noted that economic growth "moderated in the first half of the year," boosting the case to lower rates at a future meeting should that trend continue.

The Fed kept its benchmark overnight interest rate tethered in the 4.25%-4.50% range. Wednesday's Fed decision, however, saw two dissenting votes by governors, the most in more than three decades.

In late afternoon trading, the benchmark U.S. 10-year yields were last up 4.4 basis points (bps) at 4.372% US10YT=RR, while the two-year yield, which reflects interest rate expectations, was up 5.7 bps at 3.932% US2YT=RR.

U.S. 30-year yields were also higher on the day, up 3.1 bps at 4.899% US30YT=RR.

"There's enough evidence to suggest that the Fed should be cutting right now...we do think that beneath the surface economic activity has slowed down and that's true whether you're looking at consumption or it's true whether you're looking at labor," said Tom Porcelli, chief U.S. economist, at asset manager PGIM in Newark.

"In many ways the Fed is haunted by the ghost of (a) transitory past. That gives them an element of pause...I think because of the transitory mistake, it slows down their reaction function," he said, referring to the Fed's slow response to inflation during the pandemic years on views it would be short-lived.

Both Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller, who has been mentioned as a possible nominee to replace Powell when his term expires next May, were appointed to the board by Trump and "preferred to lower the target range for the federal funds rate by one quarter of a percentage point at this meeting," the Fed's policy statement said.

Treasury yields briefly ticked lower after the disclosure of the two dissenting votes.

Federal funds futures, which are tied to the U.S. central bank's monetary policy, are implying lower odds of a rate cut in September with a 50% probability, according to LSEG calculations. That was 65% before the Fed statement.

U.S. rate futures also reduced the expected pace of easing this year to just 39 bps. That was 44 bps before the Fed decision.

In other parts of the bond market, the yield curve flattened, with the gap between two-year and 10-year yields narrowing to 43 bps US2US10=TWEB after Powell's press conference, compared with 44.9 bps late on Tuesday.

The curve flattened after the Fed chief gave no signal of a September cut, leading investors to sell two-year Treasuries, pushing their yield higher.

Earlier in the session, the U.S. yields gained after data showed gross domestic product increased at a 3.0% annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said in its advance estimate of second-quarter GDP.

"This report likely gives the Fed a little more air cover to hold rates steady through summer," wrote Scott Helfstein, Global X's head of investment strategy, in emailed comments.

At the same time, U.S. private payrolls increased more than expected in July, the ADP National Employment Report showed on Wednesday.

Private payrolls rose by 104,000 jobs last month after a revised 23,000 decline in June. Economists polled by Reuters had forecast private employment increasing 75,000 following a previously reported drop of 33,000 in June.

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